T-Crossing and i-dotting: Prevent tax missteps via Evans et al. v. The Attorney General of Canada

As published on Law360 Canada

By Lorne Greenspoon and Alexander Caputo

In Evans et al. v. The Attorney General of Canada, 2024 ONSC 1955 (“Evans”), the Ontario Superior Court addressed an application for the rectification of a resolution made by the trustee of the Evans Family Trust (the “Trust”). The resolution, which was intended to allocate $375,000 of taxable capital gains to the beneficiaries, failed to clearly specify the allocation of these capital gains, resulting in unintended tax consequences.

The Evans Family Trust held shares in two companies. After the Trust was settled, the shares in these companies were sold, generating a significant capital gain. Discussions regarding the allocation of these capital gains to the beneficiaries lasted several years, with the intention of allowing each beneficiary to use their Lifetime Capital Gains Exemption (LCGE). Once a decision was made to allocate the capital gains, a formal resolution was drafted. However, the resolution failed to clearly specify the amounts being allocated, leading to ambiguity and a subsequent reassessment by the Canada Revenue Agency (CRA).

The CRA reassessed the Trust, arguing that due to the ambiguity in the documentation, the income should be taxed within the Trust at the tax rate rather than in the hands of the beneficiaries with no tax by virtue of the application of the LCGE. In response, the Applicants filed for rectification, asserting that the resolution did not reflect the original intended agreement. Relying on the principles set out in Canada (AG) v. Fairmont Hotels Inc., 2016 SCC 56, the Court found that the Applicants had provided sufficient evidence that the trustee had intended to allocate $375,000 to each beneficiary in the formal resolution. Despite minor inconsistencies in the affidavits, the evidence was deemed credible and supported by relevant documents. The Court granted rectification, clarifying that the resolution should reflect the original intent, and rejected the notion that potential claims against professional advisors would preclude rectification. The Court’s decision allowed the beneficiaries to utilize their LCGE, thereby eliminating the tax on the sale.

This case highlights the critical importance of accurate documentation in estate and tax planning. When the Income Tax Act requires specific actions to be taken, it is essential that the proper authorizations are clearly outlined in the documentation. Failure to do so can result in adverse tax consequences if that mistake can not be rectified. Alternatively, even if rectification is granted, the tax payer would bear the burden of significant stress, years of litigation and the associated costs. It is important to get it right the first time, even if it is possible to rectify the issue at a later date.

Key Takeaways 

• Accurate Documentation is Essential: In estate and tax planning, particularly when the Income Tax Act mandates specific actions, it is critical to ensure that documentation is precise and clear. Ambiguities can lead to unintended tax consequences, as illustrated in the Evans case.
• Rectification is a Powerful but Uncertain Remedy: While rectification can correct errors in documentation, it is a discretionary remedy and therefore uncertain. To avoid potential complications, it is advisable not to leave the resolution of ambiguities up to the courts, but rather to ensure clear and accurate documentation from the outset.
• The Value of Expert Legal Counsel: Retaining professional advisors with the relevant expertise can make a significant difference in protecting your interests. With the expertise of skilled professionals, you can navigate complex tax and estate planning matters more efficiently, potentially saving time, money, and avoiding costly tax pitfalls.